Reverse Mortgage FAQ: What Consumers Need to Know
In order to qualify for a reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), must owners have free and clear ownership of their home?
No. But they must be able to pay off any balances with the proceeds of a reverse mortgage in order to qualify. A borrower with an outstanding mortgage balance of $50,000, for example, will be required to use $50,000 from a $200,000 HECM to retire the mortgage before accepting the $150,000 balance.
Are there foreclosures with HECMs?
While foreclosures on HECM mortgages are relatively rare, it can happen if homeowners fail to maintain their property or pay their homeowners insurance and their property taxes on time. It can also happen if the homeowners vacate the property.
How much can you borrow with an HECM?
Applicants cannot receive an HECM for the entire home value. The actual maximum loan amount is calculated based on interest rates, the value of the home, how owners choose to receive the proceeds and the youngest borrower's age. HUD has a chart incorporating these factors and comes up with a principal limit factor, or PLF. For example, the PLF for someone who is 75 years old borrowing at a 4.25 percent interest rate is .614. That means a homeowner with property worth $300,000 can borrow up to $184,200. If a borrower is married, the loan amount is calculated using the age of the younger spouse, even if he or she is not listed as a borrower or on the home's title. This is to keep younger spouses from being evicted if the borrowing spouse dies.
Are HECMs expensive? Isn't the mortgage insurance pricey?
Fees for HECM loans are regulated by the government, and the mortgage interest rates are comparable to those of traditional or "forward" mortgages. However, over time, HECM balances generally increase, because the borrowers don't make monthly payments to reduce them. Over time, homeowners pay interest on the interest. HECMs are backed by the government, and HUD assesses an upfront premium of .5 percent, which can be deducted from the available proceeds of the loan. In addition, borrowers pay an annual mortgage insurance premium of 1.25 percent of the loan amount.
Are there fixed-interest rate HECMs?
FHA HECM allow for fixed-interest rates, but only for owners who take a lump-sum payout of HECM proceeds. Consumers who take a line of credit or select the monthly payment option will have to take an adjustable rate. In addition, the amount of loan proceeds you can access during the first 12 months after closing is limited to 60 percent of the maximum loan amount. For example, if you are eligible for a $200,000 reverse mortgage, you may only access $120,000 at first. At the beginning of the thirteenth month, you may access as much or as little of the remaining loan proceeds as you wish.
Are there HECMs available for manufactured homes, duplexes and condos?
So long as the manufactured home, condo, or multi-unit properties up to four units meet FHA guidelines, they may be used as collateral for an HECM. For properties that do not conform to requirements for federally backed loans, investors and private lenders offer reverse mortgages with their own qualifying guidelines.
What happens if the title holder must go into a hospital or nursing home?
Borrowers who leave their homes for 12 months or longer are required to pay off their HECMs. However, for loans originated since August 4, 2014, a non-borrowing spouse is not evicted from the home even if the borrowing spouse enters long-term care.
Under an HECM, can the property still be passed on to designated heirs?
An HECM becomes due when the last borrower dies. If the loan balance is less than the property value, heirs can sell the house, pay off the loan and keep the proceeds, or they can keep the property by paying off the loan or refinancing it. If the balance of the loan exceeds the home's value, heirs can purchase it for 95 percent of its value.
Can title-holders with a recent foreclosure or bankruptcy secure a HECM loan?
Applicants may not have an open bankruptcy in progress that has not been discharged. Otherwise, HECM lenders won't deny financing to people with bad credit or low income because monthly payments are not required. Recent changes to HECM rules make it mandatory that borrowers undergo a financial assessment to make sure they will pay their property taxes, insurance and home maintenance charges. Those who don't pass this assessment will have funds withheld from their loan proceeds to cover these expenses.
Are consumers required to undergo HECM counseling?
Yes. An in-person or telephone session with a HUD-qualified reverse mortgage counselor is required as part of the HECM application process. Applicants are advised of the features and benefits of a reverse mortgage given their personal health and financial conditions. They are taught about the additional housing and services available to them and cheaper alternatives to HECMs.
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